Supply And Demand

Question 1

Law of demand

Answer 1

states that, other things remaining same, the quantity demanded of a good increases when its price falls and vice versa. Note that demand for goods changes as a consequence of changes in income, tastes etc.

Question 2

Equilibrium

Answer 2

A condition or state in which economic forces are balanced. These economic variables will be unchanged from their equilibrium values in the absence of external influences. Economic equilibrium may also be defined as the point where supply equals demand for a product – the equilibrium price is where the hypothetical supply and demand curves intersect.

Question 3

Substitute goods

Answer 3

are two goods that could be used for the same purpose. If the price of one good increases, then demand for the substitute is likely to rise. Therefore, substitutes have a positive cross elasticity of demand.

Question 4

Complementary goods

Answer 4

a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good’s demand is increased when the price of another good is decreased.

Question 5

Price floors (minimum wage) and price ceilings (rent control)

Answer 5

Price ceilings only become a problem when they are set below the market equilibrium price. When the ceiling is set below the market price, there will be excess demand or a supply shortage. Producers won’t produce as much at the lower price, while consumers will demand more because the goods are cheaper.

Question 6

Elasticity

Answer 6

Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed.